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Northeast Group: Poised for Growth with Strategic Expansion and Market Recovery

Posted on October 29, 2024 at 9:07 am (GMT+8)

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Report Date and Broker Information

  • Date: October 29, 2024
  • Broker: UOB Kay Hian Private Limited

Company Overview

Northeast Group Berhad (NE) is a newly listed precision engineering components manufacturer specializing in the photonics, electronics, semiconductor, telecommunications, and optoelectronics industries. Founded in 2004, NE has developed strong relationships with prominent global listed companies, positioning itself as a reliable supplier with an emphasis on innovation, design, and high-quality manufacturing capabilities.

Stock and Financial Highlights

  • Share Price (RM): 0.615
  • Target Price (RM): 0.88
  • Market Cap: RM 455.1 million (US$104.4 million)
  • 52-Week High/Low: RM 0.615 / RM 0.475
  • Major Shareholders: Mountain Range (53.7%), Ng Chay Chin (4.0%), Chong Ewe Hean (3.5%)

Business Model and Growth Drivers

Northeast Group’s strategy emphasizes technological relevance and collaboration with clients on product development and design. NE’s product portfolio is designed to capitalize on the latest industry trends, including:

  • Fibre Laser Applications: Used in material processing, e-mobility, and medical industries.
  • Telecommunication Components: Includes connectors, switchers, and transceivers for telecom, AI, and data center applications.
  • Base Station and Antenna Technologies: Developed for the latest cellular network standards.
  • Smart Devices: Components designed for next-generation technology developed by globally recognized tech leaders.

Financial Performance and Outlook

  • Revenue Growth: In FY22, NE recorded significant revenue growth of 28%, achieving RM144.5 million before a downturn in FY23 due to macroeconomic challenges.
  • FY23 Decline: Revenue dropped to RM93.3 million, with net profit falling 51% to RM18.4 million.
  • Recovery Projection for FY25: Anticipated growth of 23% in revenue and 39% in core net profit, attributed to cyclical industry recovery, expanded production capabilities, and increased order volumes.
  • Forecasted Financials: A revenue/core net profit CAGR of 13%/21% over the next three years.

Strategic Investments and Capacity Expansion

NE has allocated significant resources to expand its production facilities and increase manufacturing capacity to meet growing demand. Key initiatives include:

  • New Factory Construction: RM40 million (47.3% of IPO proceeds) allocated for a new facility, doubling floorspace to over 435,000 square feet.
  • New Machinery Investments: RM12.38 million allocated to purchase additional CNC machines, enhancing capacity by 13%.
  • Working Capital and Debt Reduction: RM20 million allocated for debt repayment, reducing interest expenses and strengthening NE’s cash position.

Industry Position and Customer Base

NE’s clients are leaders in the photonics and semiconductor sectors, which account for two-thirds of its revenue. The firm’s investments in new product introductions (NPIs) are designed to support mass production, allowing it to capitalize on a rebounding semiconductor market from FY25 onward.

Valuation and Recommendation

  • Valuation: NE trades at a 0.5x PEG for FY25F PE, a 20% discount compared to peers in the semiconductor production equipment sector.
  • Broker Recommendation: UOB Kay Hian maintains a “BUY” recommendation with a target price of RM0.88, supported by NE’s strong fundamentals and expected revenue growth trajectory.

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